Russian clothing and footwear market: much room for foreign retailers

The Russian clothing, footwear and accessories market (CFA) has significantly
advanced in terms of value, but most of all in terms of quality and variety of
sales points. As a result of changes in the distribution structure as well as
the increase in people’s incomes, the share of medium and higher-priced
merchandise in total sales is on the rise. This creates a unique opportunity for
quality-merchandise brands to develop. However, it is interesting that while
development on the mass market has speeded up only recently, the luxury segment
in the country is already quite well established.

The Russian CFA is still dominated by open-air markets as well as independent
store operators. As a result, it is the low- and medium-price segments that
remain predominant in Russia. This situation, however, is slowly changing in
favour of the higher-price assortment, chiefly resulting from the rise in
individual incomes and expansion of modern distribution formats, i.e.
specialised CFA stores, both domestic and foreign.

Augmenting distribution

According to PMR, in 2007, retail chains that specialized in selling CFA
(both multi- and mono-brand outlets) accounted for some 30 per cent of the
Russian CFA market, which was estimated by the company to be worth a total of
close to €41bn. The modern retail share is constantly growing, as a result
of networks’ country penetration plus retailers’ diversification of
store formats, enlargement of assortment and launch of new retail projects.
Banana Mama, Wild Orchid Group, Sportmaster and Obuv Rossii are examples of
retailers that have diversified their portfolios either in terms of the size of
stores launched or new concepts and assortment. Interestingly, for some
retailers, accessories have become an independent specialization (Figure 8).

Amusingly, it is domestic chains that dominate among CFA retail chain
operators in Russia, despite the fact that there are some foreign retailers
which have already entered the country and have gained some proficiency in doing
business there. One of the reasons why foreign retailers have not yet gained a
significant position is that the country is still considered unstable, and doing
business there is thought to be risky. In addition, rent is often set up at a
higher level for foreigners than for local companies. Russian clothing chains
which benefit from the low power of foreign retailers on the mass market
include, among others, Sela, Oggi, Zarina, Savage and Tvojo (Table II).

Table II Selected leading CFA retailers operating in Russia (2007)

Nevertheless, the huge potential of the Russian market attracts more and more
retail operators from abroad. In 2005-2007 alone C&A, Next, Marks &
Spencer, TopShop, Peacocks and Debenhams as well as Peek & Cloppenburg
announced the entrance into Russia. To overcome problems, many foreign retailers
choose either franchising or exclusive distribution rather than independent
development in the country.

More-demanding customers

In line with market evolution, consumer behaviour with regard to CFA
purchases is also changing. Firstly, consumers have become more sophisticated.
Increasing competition and the fact that people have gradually become accustomed
to better service have made them more demanding. The store environment and
service have thus become crucial.

Nevertheless, it is still quite important to note that though the attitude
and expectations of Russians towards shopping are changing, Russian consumers,
particularly in the low and medium brackets, are not sufficiently brand-oriented
to display considerable brand awareness.

This means that there is still much room for new brands and branding. In the
luxury arena, on the other hand, consumers exhibit a high level of brand
awareness.

Luxury already in place

Indeed, customers in the CFA luxury segment are significantly more brand
aware and the market itself is already quite developed. At present, Moscow is
one of the most fashionable European cities, with boutiques of all formats
selling designer clothing, footwear, accessories, watches and jewellery.
Interestingly, it is, in turn, dominated by foreign brands. Those which have
already established a presence in the country include Louis Vuitton, Cartier,
Gucci, Prada, Armani, Chanel, Christian Dior, Hermes, Tod’s, Versace, Jimmy
Choo, Tiffany, Bvlgari, Ermenegildo Zegna and many more.

According to PMR estimates, the luxury/premium clothing and footwear market
in Russia amounted to €6.7bn in 2007, equaling over 15 per cent of the
country’s total CFA market. It is expected to further develop, which,
however, would be somewhat impeded by the limited supply of appropriate
locations and rent hikes both in the capital as well as in other major cities
where the operators intend to expand, particularly in St Petersburg. According
to Cushman & Wakefield, average rents on Nevsky Prospekt in the latter city
grew by over 80 per cent between June 2006 and June 2007, making it the fourth
location in the world in terms of the biggest rental increases in the local
currency.

More yet to come

Over the past 15 years the Russian CFA market has significantly advanced in
terms of value, but most of all in terms of quality and variety of sales points.
It is, however, even more important that its potential for further development
is still considerable. PMR estimates that the Russian CFA market would develop
steadily by some 10 per cent annually up to 2010. The major changes which would
influence this progress include rising personal incomes, further expansion of
specialised clothing retail outlets, development of shopping centres as well as
better market understanding by both domestic and foreign retailers. The latter
especially have not had their last word in Russia; in fact, they have yet to
give the market a real push.